Seven foundations for a stronger economy

The independent Industrial Strategy Commission has issued its emerging findings. Commissioner Prof Diane Coyle outlines how the UK can address some of its longstanding economic weaknesses and deliver meaningful prosperity for everyone.

Previous government intervention, which has been more accidental than purposeful, has not delivered a strong or fair economy

Political consensus is key in building a new and sustainable industrial strategy for the UK

The commission has identified seven foundations for a successful approach, with specific recommendations to follow

As a member of the Commission, I have welcomed the fact that politicians across the spectrum and policy officials have accepted that the UK needs to implement a consistent, strategic approach to the government’s role in the economy. This acceptance comes after more than a generation of claiming that the state and the market are alternatives, meaning that the extensive state intervention – through public investment, spending on education or R&D, regulation, tax incentives, and so on – has been accidental rather than purposeful, and what’s more prone to destabilising policy swings when governments (or even individual ministers) change.

There have even been, on a small scale, several attempts over the years to implement industrial policies. Some have been successful in their own sphere, such as the creation of a thriving auto sector with a significant UK supply chain. However, a list of policies does not amount to a strategic, long term view. What’s more, whatever UK governments have been doing, it has failed.

The UK economy has some longstanding weaknesses:

the level of productivity is nearly one fifth lower than other similar countries, and has been stagnant for a decade;

investment as a share of GDP has been lower than comparator countries for more than forty years;

the regional differences in incomes are wider in the UK than in almost all other rich economies;

the economy is highly centralised;

skills are unevenly distributed and too many citizens have low levels of skill;

new technologies spread very unevenly and the UK’s ‘long tail’ of underperforming firms is longer than in other countries;

the UK has a large and stubborn current account deficit.

The new industrial strategy needs to address these weaknesses, and in a way that commands wide consensus, with an institutional framework that is more stable than in the past, to avoid policy see-saws. It will clearly be about mobilising the private sector, in services as well as industry; but there will also be a well-defined role for the state in co-ordinating, promoting investment in science and innovation, and investing directly in infrastructure, skills, business support and research.

Our report identifies the following priority areas at present:

Decarbonisation of the energy economy whilst maintaining affordability and security of the energy supply.

Ensuring adequate investment in infrastructure to meet our current and future needs and priorities.

Supporting established and emerging high-value industries – and building our export capacity in a changing trading environment.

Enabling growth in parts of the UK outside London and the South East in order to increase the UK’s overall productivity and growth.

The final report later this year will contain detailed recommendations. At this stage we have identified seven foundations for a successful strategic approach.

First, the institutional framework needs to be established, giving stability, joining up across departmental silos, and allocating responsibility to the devolved nations and English local authorities or city regions. The strategy needs to be owned by Number 10 Downing Street and the Treasury, but be monitored independently. The landscape of multiple, confusing sources of business advice and support must be simplified too.

Secondly, the strategy must enable the whole of the UK to grow. This will be essential to improve national productivity performance; the divergence between London and the rest of the UK is already so extreme that London alone cannot improve the average. This will require a significant change in mindset and also policy appraisal tools.

The R&D intensity of the UK is too low and a key aim of industrial strategy should be to correct this. This needs to be done in a way that considers the whole innovation landscape, including both public and private sectors, and the whole spectrum from basic to translational research. Most of the increase will be privately funded, but public funding of research crowds in additional private investment.

A robust competition policy is a vital component of industrial strategy. Ensuring that innovators do not face prohibitive barriers to entry or expansion – and preventing incumbents from exploiting policies to enhance their own market position – will help avoid the risk of ‘picking winners’ among incumbents.

Greater diversity within the financial eco-system is essential to increase investment, although there are no easy answers to the long-standing issues with financing investment in the UK.

Skills policy must be more stable and holistic in its approach. Both institutions and curriculum must reflect these aims as well as create meaningful links to employers and supply chains. Increasing the demand for skills is also important, so that once achieved, they can be better utilised and thus will be more likely to drive higher growth, productivity and wages.

Finally, the state needs to use more effectively its own role as a regulator, an investor and buyer of services. The role of the state as a ‘lead customer’ for new technologies should be exploited in support of the innovation needed to meet the state’s key strategic goals.

There will need to be a change in attitude from the one that regards the goal of procurement policy to be solely to achieve short-term cost savings, to one that recognises that only through driving innovation will the long-term goals of the state be met. In infrastructure investments, appraisal methods need to be more forward looking and recognise the potential for the right investments to achieve qualitative, rather than marginal, change.

This is an ambitious agenda at the best of times, given the legacy of economic weakness. But the challenges of Brexit-related uncertainty, and of rapid technological innovation, make it all the more urgent for politicians across the spectrum and around the whole of the UK to get behind a strategic government role to support business and deliver meaningful prosperity for all citizens.

The Industrial Strategy Commission is chaired by Dame Kate Barker and supported by Policy@Manchester at The University of Manchester, and SPERI at The University of Sheffield.

About Diane Coyle

Diane Coyle is Professor of Economics at the University of Manchester and Co-Director of Policy@Manchester. Professor Coyle is a member of the Natural Capital Committee and an ONS Fellow. She was previously Vice-Chair of the BBC Trust, a member of the Migration Advisory Committee and the Competition Commission.